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Macroeconomics Week 2 Class Notes

by: Nikita Hendricks

Macroeconomics Week 2 Class Notes Econ2307

Nikita Hendricks

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About this Document

Wealth of the Nations 9/2/16 Chapter one important concepts to know for the exam.
Dr. Ssozi
Class Notes




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This 7 page Class Notes was uploaded by Nikita Hendricks on Friday August 26, 2016. The Class Notes belongs to Econ2307 at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by Dr. Ssozi in Fall 2016. Since its upload, it has received 44 views. For similar materials see Macroeconomics in Economics at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.


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Date Created: 08/26/16
PRINCIPLES OF MACROECONOMICS DR. SSOZI CLASS Chapter 1 Wealth of the Nations:  Economics Study of how people use scarce resources to choose how to satisfy unlimited wants  Human Capital Knowledge and skills that enhance ability to improve  Labor Physical and mental activity to produce goods and services  Income per capita (GDP per capita) GDP / total population Consumption The use of goods and services by households.  Durable Goods Goods last at least one year  Non- Durable goods Goods lasting less than one year  Services Non-Tangible goods  Invest Purchase of new capital bought by households and firms  Government Expenditure Govern Purchases of final goods to services includes transfer payments and interest paid by government.  Exports Value domestically purchase goods and services sold abroad  Imports Foreign produced good/services bought domestically  Trade Balance The balance of trade is the difference between a country's imports and its exports for a given time period.  market basket             the set of goods and services bought by a typical consumer  Price per Unit Cost per unit + product per unit  Cost Wages+Rent+Interest  Sales Revenue-Purchases= Value added  National Production National Expenditure= National Income  Savings Savings must be equal to investment Savings rate equal Investment  Gross Domestic Product the market value of all final goods and services produced within a country in a given period of time  GDP Identity Y=C+I+G+NX GDP= consumption + investing + government spending+ net exports(exports-imports) What isn’t measured by GDP? 1. Depreciation: fall in value of goods due to obsolesces or wear and tear. 2. Home Production: Goods and services produced and consumed with households without payment. 3. Underground Economy: Black to grey Markets transactions that are hidden from government. 4. Pollution to other negative externalities 5. Leisure Gross National Product(GNP) production by a countries national Production by a countries residents regardless of location. GNP equals GDP and production by US labor and capital abroad- production by foreign owned labor/capital in the US. Nominal VS Real GDP Nominal GDP= Sum(QIT.PIT) i-goods produce t-year Real GDP= Sum(QIT.PI base year) Real GDP per capita RGDP/total population GDP Deflation GDP deflation= NGDP/RGDP*100 Real GDP growth Growth= RGDP2-RGGDP1 *100/RGDP1*100/RGDP1 GDP deflator inflation rate GDP deflator1-GDP deflator *100/ GDP deflator1 Consumer Price Index A measure that tracks changes in prices paid by a typical consumer for a fixed basket of goods. CPI= Cost of fixed basket at current prices*100 Cost of fixed basket at base year prices Cost at current prices= Sum (QI Base year* Pricei current year) Cost at base year prices= Sum (QI Base year * Price Base year) Real Spending: Nominal Spending adjusted for inflation Real Spending=Nominal Spending*100 CPI CPI vs GDP deflator CPI measure consumer expenditures only; GDP deflator includes everything produced within a country. CPI uses a fixed basket; GDP deflator changes Q each year. Inflation: Rate of increase in the General Price level, Computed as a year over- year percentage change. Negative inflation is called Deflation. Inflation rate= (Price Index2- Price Index1) *100 Price Index1 Adjusting nominal variables Price Index 2016= Value in 2016 dollars Price Index 1950 Value in 1950 dollars Value in 2016 dollars= Price Index 2016* Value in 16950 dollars Price Index 1950 Example: In 1967 a super bowl ticket cost $6 CPI in 2967=33 CPI in 2012=230 Computer the real cost of 1967 super bowl ticket in 2012 dollars. Price in 2012 =230/33 *6=41.82 PRINCIPLES OF MACROECONOMICS DR. SSOZI CLASS Wealth of the Nations Chapter 1 Important concepts to know 1. What is Gross Domestic Product? Measuring the annual cost of providing all final goods and services? 2. Gross Domestic Product equation C + I +G + X 3. How to measure national income GDP - Gross Domestic Product, GDI Gross Domestic Income 4. Calculate the Real GDP (nominal GDP/ price index)/ 100 5. What isn't measured by GDP? Physical Capital, Depreciation, Home Production, Underground Economy, Negative Externalities and Leisure. 6. What are the four categories of spending in the expenditure method of  measuring GDP? consumption investment government spending net exports 7. Consumption Expenditures Money spent on consumer goods and services. 8. What is labor income? Any form of payment that compensates people for their work 9. What is Capital Income? Any form of payment that derives from owning physical or financial capital 10. How do we avoid double counting? we use value added. Value added, for any firm, is the market value of its product minus the cost of inputs purchased Nominal vs Real Nominal GDP: calculation in which goods and services are valued at current prices Real GDP: calculation in which goods and searches are valued at constant prices GDP deflator a measure of the overall nominal GDP/real GDP)x100 GDP per capita: a country's GDP change in prices in an economy, using the ratio between real and nominal GDP. GDP deflator formula is (divided by its population Productivity: output per unit of input Per capita output: total output / total population Market value: used so there are common units to add up goods and services (use $ in U.S.) The price at which a good or service is bought or sold Trade deficit: a negative balance of trade Trade surplus: a positive balance of trade Consumer Price Index 100 time the ratio of the cost of buying a basket of consumer goods using current prices divided by the cost of buying the same basket of consumer goods using base-year prices Remember we can calculate a Real GDP based on the value of the Nominal GDP and a price index. Three approaches to measuring GDP  Production approach Value of producers + Value of Sellers + Value of Govt  Expenditure approach Separate into categories. Don't want to double count. don't include intermediate products (raw peanuts/labor of peanut factory workers)  Income approach same result as expenditure method in economy without any imports and exports Formula approach for income: income=Wages+interest+rental income+profits Circular flow Diagram actors: Households, Firms, Government, Financial intermediaries and Rest of the world.


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